Are you hyped about what is behind the most famous cryptocurrency? We are talking about bitcoin, BTC for short. If it is yes, you will be surprised to learn that the specific case of a Distributed Ledger Technology protocol, abbreviated as DLT, known as blockchain is used. Here we will focus on centralized and decentralized ledgers, DLTs, their difference with blockchain, usage, and advantages of DLT. To make matters as simple as possible, we are going to use analogies from real-life examples. We want to ensure that you benefit from what you read here.
What are Distributed Ledgers?
Storing data is accessible. We have cloud and other solutions. However, how to check whether the original information is genuine? What if hackers found a way to tamper with the data and left no traces? For a long time, keeping an up-to-date database relied on a centralized manner. Let’s depict an analogy of a centralized ledger. You live in a small village, and there is only one bookmaker with his notebook.
All those in debt have temptations to alter that notebook, and it is not easy for the bookmaker to keep it intact. In this specific scenario, the bookmaker’s notebook is the centralized ledger. All the info is in one place. If anybody wants to learn their debt amount, they rely on that bookmaker. Debtors also depend on the inf that is written on the bookmaker’s notebook.
Think about another imaginary situation: the same village, the same bookmaker with the notepad, but with a slight difference. Whenever the bookmaker makes a note to his notebook, he calls several other people and informs them about changes. Also, each morning he verifies the previous info. That way, multiple yet identical copies of the notebook exist in diverse locations. All other players check the bookmaker’s voice for confirmation. This way, even if someone can alter the original notebook, they probably can’t modify the rest.
However, there is an advantage for debtors. They can learn their debt amount by calling any of those people who have exact copies. Ladies and gentlemen, you just visualized a small analogy for the Distributed Ledger Technology, aka DLT.
How Distributed Ledgers work
In the Fintech world, DLT is identified as a protocol that makes the functioning of a decentralized digital database possible securely (remember the voice check?). In Layman’s terms, that protocol intends to build a decentralized environment. This method is achieved by eliminating the central authority and relying on a widely distributed network. It is immutable, hack-resistant, and secure as data is stored in multiple places and no single person controls it.
Why the hype? What aspects of the distributed ledger appeals majority? Try to answer this question: How to achieve full transparency and keep the information secure and protect privacy at the same time? This question seems like an oxymoron. Except it is not, and the protocol that we mentioned earlier serves us with building such a system. It is the base of blockchain. Let’s delve into why there is so much enthusiasm around this tech protocol.
The main advantages of Distributed Ledgers
- Decentralization. No central database exists. There is no third party between the two parties. Lack of centralization results in the absence of central authority. In the world of economy, this ultimately may render useless banks for peer-to-peer payments. The transfer commission between two parties can cost as low as several pennies, and transfers happen even faster.
- More transparency and simpler testability. The same data exists throughout the network. In case there is a need, you can encrypt the ledger. Changes on the network must happen simultaneously and in real-time whenever the network reaches a consensus. Since the data is distributed throughout the network, it is effortless to test the data integrity. Therefore, transparency. Higher transparency eliminates fraud and scams.
- Automation and programmability. You may have heard of the term “smart contract.” This is an example of automation: whenever certain conditions are met, specific other actions take place automatically. For instance, whenever a client signs that they received the products, the shipping company automatically receives the payment.
- Immutable and verifiable. All of the aforementioned make DLT immutable. Also, you can verify whether at any point changes were made consensually.
Importance of Distributed Ledger Technology
We always seek a tech that we can rely upon. That is no different in the finance sector. Every sector somehow has a relationship with the financial one. Therefore, making it more transparent, hack-resistant, and reliable automatically affects those areas. However, as long as there are central authorities, it is hard to avoid corruption at any level.
In theory, DLT can spare us of any central authority. Think of banks, manufacturing, real estate, voting, tax collection, etc. If we can achieve complete decentralization in any aspect, we can save time, money, and other valuable resources without compromising security. However, we need some time to fully adopt such a revolutionized technology. A lot of its derivatives are developed.
All of the records on the network are available at any time. Shared data over the network nodes means we can check data integrity at any given time. It can only change when the network reaches a consensus. At the core, DLT can make unhackable, secure financial transactions but not limited to it. Below we share some use case scenarios.
Distributed Ledger Technology vs. Blockchain Technology
Remember our initial question about bitcoin and blockchain? So, here is the exciting point. Bitcoin is a payment unit on the blockchain, and blockchain is based on DLT. Let’s look into an analogy. If you are a little familiar with geometry, you must know that a rectangle is a specific quadrilateral version. All of its angles are equal to 90 degrees.
However, there is also a square. It is a precise rectangle. Not only angles are equal, but also all sides of the rectangle are also equal. We can deduce that a square is an extraordinary rectangle that requires a bit more conditions.
The same applies to DLT and blockchain. In our analogy, DLT is a rectangle, and blockchain is a square. Blockchain technology also has its data distributed among network nodes but adds another layer of cryptographic security. Not only that, blockchain takes advantage of the other technologies which are out of the scope of this article.
There is a major difference between DLT and blockchain. Blockchain uses blocks to store data and is encrypted cryptographically. Then, each block is linked to the former, and the latter blocks are connected, or rather chained, together. Due to this, the term blockchain has emerged. Anyone can be a part, aka node, on the network, and no permission is necessary.
Distributed Ledger Technology Examples
You can talk and talk about DLT all day. However, the main question is, what can be realized or has already been realized using this tech? Let’s dive into some examples.
- Bitcoin. The P2P payment system known as Bitcoin, whose abbreviation is BTC, is the pioneer of cryptocurrencies. You can send BTCs, or any portion of it, as a payment to anybody with a BTC wallet. You don’t need any banks, mediums, or third parties. You can only send what you have and only once as BTC prevents double-spending.
- Blockchain. A lot of different companies are working on a lot of other projects involving blockchain.
- Supply-chain industry. Tracing the products from the moment they are ready for the market to the point when it reaches the customer is cumbersome. However, we can use DLT to make it cost and time-efficient. Amazon, cooperating with IBM, has already started doing this. You can track food’s origin in a matter of seconds using public ledgers. What is more, if sensors are used to enter the data, we can avoid a lot of possible mistakes. Using this scenario will prevent product loss as well.
- Smart-contracts. Lately, one of the fancy words used in the tech industry. Basically, if some conditions are met, a specific set of operations are executed.
- To prevent counterfeit products. Nobody can backward modify the data on the DLT. Therefore, if info on product origins is on the DLT records, anybody can easily verify its origin. These can be any products: jewelry, other luxury goods, medicine, artwork.
- Legal documents. Documents like passports, diplomas, and other certificates can also be stored using distributed ledgers. This benefits not only users, eliminating the ample amount of time needed to collect multiple documents from various places, but also companies, which can quickly check whether provided documents are genuine or not.
- To bring transparency to elections, NGOs, and nonprofits. It is not abnormal to hear news about corruption related to elections, NGOs, and Nonprofits. It is disappointing that people can do not much after what happened—only prosecuting the responsible people. What if we can prevent this from the beginning? If everything was available publicly and transparently, we could avoid those adverse effects. DLT is your friend in this case.
How to make the right choice?
It is not uncommon to hear that companies claim to work on or develop products based on distributed ledgers. 4ireLabs is one of those companies with standing out points. Since our inception in 2010, we have built a robust reputation and have worked with prominent companies. Moreover, we create diverse projects that range from DLT, AI to Defi. Our innovative professionals are meticulously selected to provide premium products to our clients.
We can consult and develop a project with your ideas. Our completed projects are proof of what we can do for you. You can take a look at our portfolio and see that for yourself. Also, take your time to read our blogs about our plans, partnerships, etc.
Our services are but are not limited to financial software development, consulting services, blockchain development, AI, and ML. In case you have something particular, feel free to contact us to discuss the details.
Distributed data over the network is how DLT works. Such ledgers’ main goal is to build a database immune to changes, hacks, and other harmful aspects. Not only that, if implemented correctly, it can save precious resources like time and money.
DLT is still in its infancy. When the internet first emerged, not everybody could see its full potential. Even now, there is much to develop. Nevertheless, DLT and blockchain have made a breakthrough in the tech industry. Multiple projects are available while many more are either being built or in the concept stage. Still, a lot has to be developed.
At 4ire Labs, we intend to realize your ideas to life and build custom solutions in Defi. We have enough experience to execute them all. All you need to do is get in touch with us.